Europe closes at 3-week low; inflation data, Portugal weighs

European shares closed lower on Thursday with investors reacting to quarterly earnings and some disappointing data from the euro zone.

European shares closed lower on Thursday, hitting a three-week low, with investors reacting to quarterly earnings and some disappointing data from the euro zone.

Inflation misses

The pan-European FTSEurofirst 300 Index closed provisionally lower by 1.2 percent at 1,350.42 points with heavy losses for the German DAX, the French CAC and the Spanish IBEX. Portugal's PSI 20 Index slipped over 3 percent with shares ofBanco Espirito Santo nosediving 40 percent after being suspended for much of the morning session. This came after it posted a net loss of 3.58 billion euros ($4.80 billion) for the first half of 2014 after the close of trade on Wednesday. The lender has been embroiled in turmoil for weeks, with former CEO Ricardo Salgado arrested in connection with a tax evasion and money-laundering investigation.

Euro zone inflation data also weighed after it fell more than expected in July, according to the new figures. This sparked renewed fears that the region could be heading for a period of deflation. Official flash figures showed that inflation rose by 0.4 percent compared to the same period last year, failing to match expectations of 0.5 percent in a Reuters poll. It is the lowest level seen since October 2009 and below last month's reading of 0.5 percent.

U.S. stocks declined on Thursday, positioning the Dow and S&P 500 for their first monthly losses since January, as the unexpected drop in European inflation fueled worries about deflation and a jump in U.S. labor costs furthered the idea that the Federal Reserve would have to hike interest rates sooner rather than later.

Investor sentiment was also hit by the default by Argentina. The country defaulted for the second time in 12 years with last minute talks with creditors failing to find a resolution.

Read MoreArgentina defaults but eventual deal possible

Meanwhile, the European Union confirmed the sanctions against Russia on Thursday afternoon which will curb arms sales and cut off financing for targeted Russian banks. The banks included in the penalties are Sberbank, VTB Russian Agriculture Bank (Rosselkhozbank) and VEB.

Earnings weigh

Traders cited a variety of reasons for the heavy selling seen in markets on Thursday but its was corporate earnings news that made sure the session started on a negative tone.

Shares of German sportswear company Adidas finished provisionally lower by 15 percent, after the company issued a profit warning and said it would scale back plans to expand in Russia.

Credit Suisse shares finished provisionally lower by 1.5 percent after it became the latest major European bank to admit it is under investigation for its use of alternative trading venues called "dark pools".

Meanwhile, BNP Paribas posted a $5.7 billion loss for the second-quarter, after being hit by a near-$9 billion U.S. fine. The loss was expected and shares of the bank finished provisionally lower by 0.7 percent on Thursday afternoon.

At the other end of European benchmarks, shares of oil and gas major Royal Dutch Shellfinishedprovisionally higher by 2.3 percent higher on Thursday. This came after it reported second-quarter earnings, on a current cost of supplies basis, of $5.1 billion, compared with $2.4 billion for the same quarter a year before.